Industrial N Illinois

The main event: How the post-recession era is affecting industrial real estate

The main event how the post-recession era,ph1
The main event how the post-recession era,ph2

With the economic recession firmly in the rearview mirror, companies that manufacture and distribute consumer goods are seeing consistent growth again. This growth is triggered by two events that typically will impact each company’s real estate decisions: high levels of orders due to pent up demand, and acquisitions or mergers with other companies seeking revenue growth and the creation of greater efficiencies.

High growth due to pent-up demand

Coming out of the long recession, many companies saw an increase in demand for their products. As a result of that demand, their real estate needs often change across the board and through their supply chains. They need more space for raw materials and employees who are making their goods. They may need new equipment to keep up with the increased demand. And they may need extra warehouse space or an additional distribution center to store and then dispatch their completed goods.

These requirements spawned a growing number of leases and sales of industrial buildings at a just-now-plateauing rate across most Chicago submarkets. Increased demand led to companies, including many manufacturers as well as direct-to-consumer retailers like Amazon, to expand their space over the last few years, leaving industrial vacancies at near record lows.

High consumer demand for new goods particularly affected the online shopping industry: in the last 36 months, Amazon has either built for their own account or leased multiple spaces of more than a million square feet in Wisconsin and Illinois, along with no less than eight additional “last mile” facilities of 60,000 to 90,000 square feet in the Chicago metropolitan area. As many online retailers attempt to mimic Amazon’s growing distribution footprint, industrial real estate professionals predict that both large and smaller warehouse spaces will be snapped up.

Pharmaceutical and biotech companies are also playing a major role in leasing and sales, especially in Lake County and other north suburban submarkets. But many pharmaceutical manufacturers accept that they are not primarily in the real estate industry, so they prefer to lease their large corporate spaces instead of buying. They prefer to invest in improving other parts of their business, such as research and development, marketing or infrastructure, instead of investing large tranches of capital in illiquid assets such as real estate.

In contrast, many corporations, especially in the $5 million to $25 million revenue range, prefer to own their buildings. One business I’m working with had acquired more than 200,000 square feet of Class C facilities in a valuable urban location, with plans to maintain the buildings, work in them for several more years, relocate to an alternative market, and then sell the close-in properties to a redeveloper for a large profit. With high demand for average real estate in good in-fill locations, companies can support their business plans AND reap substantial profits for their functionally obsolete real estate when they respond in a timely manner to such increased demand.

Acquisitions, dispositions and limitations on job growth leave some spaces vacant

On the other hand, increased prosperity and the need to gain operational efficiencies have led to a steady stream of corporate acquisitions and dispositions. While many acquiring firms choose to keep the real estate in place when they buy a company, others choose to relocate or consolidate to right-size their real estate operating costs. Sadly, given the state of Illinois’ ongoing economic chaos, patches of vacancy in several Illinois submarkets have sprouted as companies exit to states with more beneficial overall economic, political and tax structures when they are acquired or merged.

While high consumer demands and corporate mergers and acquisitions are causing shifts in real estate demand, the federal administration, until recently, delayed some company’s real estate decisions. Now that the long-awaited federal tax overhaul has been signed into law, companies will have a better handle on whether or not they should make capital improvements to their real estate in 2018 or later. Others see the ongoing low interest rate climate as an outstanding opportunity to purchase underpriced or “value-add” real estate.

Robotics have also impacted the U.S. manufacturing industry, although not as heavily as some may have initially thought. As new machines are put in place to improve manufacturing processes, often they displace some workers. In contrast, each robot may require two or three employees to operate, maintain, calibrate or repair it when it breaks down, providing replacements for some of the jobs lost. As a result, the net impact on real estate is not as dramatic as previously feared. In a growing number of instances, the needs for more staff and space are raised.

What to expect in industrial real estate

While we’re no longer seeing as many manufacturing jobs disappearing overseas, a growing number of those jobs have returned to U.S. soil in recent years. Lower quality control standards in China and more diverse domestic labor markets have caused more corporations to reshore their manufacturing work, bringing jobs back into many under-utilized or vacant buildings across the country.

The only constant is change. While U.S. industrial real estate has continued to expand for the past three to five years, recent industry reports indicate that vacancies are up slightly from prior quarters while net absorption, for the most part, has leveled off or increased slighty in certain submarkets. Whether it’s uncertainty as to the real impact of the Trump administration’s business-friendly tax policies and a reduced regulatory framework, or questions about Illinois’ finally passed budget and its impact on the industrial labor force, industrial real estate professionals will likely see ongoing activity with only some moderation to their businesses over the coming years.